Private student loans can help make ends meet while pursuing higher education. They should be a last resort, after exhausting all other financial aid and maximizing your federal student loan allotment.
While you can use a private student loan for a variety of degree programs and situations, it’s wise to limit your borrowing. Since they’re credit-based, only especially creditworthy applicants secure low APR offers. Private student loans also carry fewer protections than federal loans.
Keep in mind each private student loan provider has its own set of terms, rates and eligibility requirements that vary, unlike a typical federal loan.
Like federal loans, private student loans can be applied toward education-related expenses, including (but not limited to) tuition and school fees. You might also use private loan money to help cover secondary but significant expenses.
Drawbacks of private student loansPrivate student loans can benefit borrowers with strong credit histories or with cosigners who are especially creditworthy. If you fall into this category, you might net a lower interest rate from a bank than you could from the federal government. You might also prefer private student loans for their exclusive options, such as variable rates.
On the other hand, private loans are riskier propositions for borrowers, regardless of their credit strength. For instance, you might see your initial low variable rate rise with market conditions, then find that private loans provide a fraction of the repayment protections included with federal loans. Income-driven repayment, for example, is seldom available from private lenders.
To qualify for a private loan, you’ll need to attend an eligible school, as well as meet any age, education or citizenship requirements. You’ll also need to meet a lender’s criteria for credit and income, or apply with a cosigner who does.
Many lenders let you check your rates with an online prequalification that won’t impact your credit (as opposed to a more in-depth hard credit inquiry). Compare offers from a few different lenders before choosing one, so you can find the lowest rate for your private student loan.
Your cosigner, if you have one, will also be asked for this information.
Most private lenders require a minimum credit score before approving you for a private student loan. If you have bad credit, you can boost your chances of qualifying by applying with a cosigner. Even if you can qualify on your own, adding a creditworthy cosigner to your application could help you get better rates.
Note that your cosigner will be equally responsible for the loan, and their credit will be impacted if your loan falls into delinquency or default. Some lenders may allow you to release your cosigner from your loan after a certain period of on-time payments.
With or without a cosigner, there are student loans for bad credit.
Historically, about 9 out of 10 private student loans are borrowed with cosigners — a creditworthy individual who agrees to repay the debt if you, as the primary borrower, fall behind. That’s because teens and 20-somethings often don’t have the thick credit file required to meet the underwriting standards of banks, credit unions and online-only lenders.
Even if you’re a rare case of a student who could qualify on your own, attaching a cosigner to your application could score you a lower interest rate. Just ensure you and your cosigner understand the legal obligations of repayment before deciding to team up.
And if you prefer to go it alone, check out student loans without cosigner requirements.
Each lender sets its own loan minimum and maximum borrowing amounts. Just because you can borrow up to your remaining cost of attendance, however, doesn’t mean that you should.
Your loan balance, interest rate and loan term (definitions below) can dramatically impact the overall costs of a private student loan.
When you take out a student loan, your balance is the amount you borrowed. As interest adds up, your loan balance can grow. You might have several student loan balances, depending on how many loans you took out.
When you borrow a student loan, you agree to pay back the amount you borrowed, plus any interest that accrues. With the exception of federal subsidized loans, interest starts racking up from day one. Private student loans can come with fixed or variable interest rates. You can usually choose which rate type you prefer. Variable rates often start lower than fixed ones, but they run the risk of increasing over time.
The term is the number of years it will take you to repay your loan. Private loans are not eligible for federal repayment plans. Most lenders will let you choose a term of five to 20 years when you borrow.
To determine how much in private student loans you should borrow, start by considering a couple of general rules of thumb: Borrow as little as possible, and borrow only what you can realistically afford to repay once you leave school and enter the workforce.
Then estimate your proper borrowing amount by doing a little homework:
| Question | To find the answer... |
|---|---|
| How much would I have to borrow? | Estimate higher education costs using tools like the College Scorecard (or your financial aid award letter, if you have one) |
| How much would it cost to borrow? | Plug potential borrowing scenarios into student loan calculators |
| Can I afford to borrow that much? | Utilize free resources like the Bureau of Labor Statistics to project your postgraduate wages |
After applying for a private student loan, you should receive a formal approval or denial within a matter of days, sometimes hours, depending on the lender. More likely, a customer service representative from your potential lender will follow up with you after you file the application to provide a status update or request additional documentation.
If time is of the essence — perhaps your next semester or academic term is fast approaching — consult the preferred lenders on your list about how quickly you can expect an answer on your application. You might also consider so-called emergency student loans.
Financial aid disbursement is black and white for federal grants and loans but, in the case of private student loans, is more unique to each lender. Generally, a private student loan is sent to your school and applied directly toward your outstanding tuition and fees. Any unused student loan money is typically then diverted to you, via check or online deposit.
To understand how this process will work with your particular school and lender, ask ahead of time. Your school’s financial aid office, for example, may have its own way of redirecting leftover loan funds. Your lender might also disburse your loans in one lump sum or divide it into installments spread over each semester or academic term.
The world of student loans can be confusing to navigate, and doing it alone is darn near impossible.
Fortunately, there are many ways to get help without paying for it.
Also consult free online resources like LendingTree, where you can get your questions answered via blog content or make the math of borrowing simpler using our suite of calculators. For now, these guides might be most useful:
